Managing today’s

geopolitical risks
A financial services guide

KPMG. Make the Difference.

KPMG International | kpmg.com

 Geopolitical risk drivers — keeping No need to reinvent the wheel — The absence of a strategy Embracing the shift in
it simple amid complexity same methods, different goals is the worst strategy geopolitical risk management

Geopolitics and political uncertainty —

the greatest risk to business growth?
What is a permacrisis? And why is the term so well In this evolving landscape, globalization itself is and defense. This strategic realignment, intended to
suited to reflect the key global events and challenges of undergoing significant transformation. The future of bolster resilience, contributes to making inflationary
the last few years? global trade, supply chains, and economic integration is pressures more persistent and structurally ingrained
increasingly influenced by national security priorities and than markets previously anticipated.
Permacrisis describes the feeling of living through
heightened policy interventions, particularly among the
a period of ongoing conflict, inflation and political Forward-looking businesses wisely recognize the need
world’s leading nations.
instability.1 And it succinctly sums up today’s troubling for decisive action amid today’s profound challenges.
reality amid ongoing global volatility that has seen This year, geopolitical developments are poised to
Timely strategies to manage today’s geopolitical
the world pivoting from one disruptive challenge to further affect supply chain strategies, alter investment
risks should be high on the agenda of every
another. Make no mistake — today’s geopolitical destinations and escalate costs for companies. Whereas
financial organization. This paper explores three steps
landscape is growing more complex and its impact on highly integrated and complex supply chains were once
to achieving successful and sustainable geopolitical
the economy is undeniable. celebrated as achievements of free trade and economic
risk management using a comprehensive and
efficiency, today, they are often viewed as vulnerabilities,
We can no longer take the traditional pillars of peace future-ready framework.
necessitating strategic adjustments in the face of
and prosperity for granted amid economic trends
escalating geopolitical competition.
and geopolitical events that include ongoing conflicts
in Europe and the Middle East, inflation’s impact on In response to these challenges, there is a noticeable
consumers and businesses, bank liquidity and stability shift toward national industrial policies that prioritize
challenges, global recession fears, the aftermath of the domestic suppliers, aiming to onshore or “friend
global pandemic’s disruption, labor-market challenges and shore” procurement within critical industries such as
the global battle for talent in the digital economy. technology (semiconductors), energy, pharmaceuticals

1
Helen Bushby, “Permacrisis declared Collins Dictionary word of the year,” BBC.com, November 1, 2022.

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 Geopolitical risk drivers — keeping No need to reinvent the wheel — The absence of a strategy Embracing the shift in
it simple amid complexity same methods, different goals is the worst strategy geopolitical risk management

01
Geopolitical risk
drivers — keeping
it simple amid
complexity

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 Geopolitical risk drivers — keeping No need to reinvent the wheel — The absence of a strategy Embracing the shift in
it simple amid complexity same methods, different goals is the worst strategy geopolitical risk management

Defining geopolitical risks By focusing on specific megatrends, related subordinate

trends with the potential to affect a bank’s geopolitical
Geopolitical risks involve emerging, unpredictable, risk exposure can be identified and included among
or hazardous events with political underpinnings potentially relevant risk drivers.
that could affect the strategic operations and
activities of financial institutions — including strategy Businesses should start taking a closer look at the
development, profit and revenue targets, product following two geopolitical megatrends and their direct
delivery, market activity and operational processes. impact on the financial sector:
From a financial industry perspective, geopolitical • Global fragmentation: The world is undergoing
risks are not concrete risks but risk drivers. Similar to significant transformations marked by the
ESG risk drivers, geopolitical risk drivers can directly or partial economic disengagement of nations and
indirectly affect other risk types such as credit, liquidity the emergence of new economic and political
or non-financial — ultimately threatening the stability alliances, rendering years of global reconciliation
of financial institutions. a distant memory. The disruption of European
Unlike ESG risk drivers such as extreme weather peace undoubtedly fueled this trend. However,
events, geopolitical developments or tensions are it has been shaping the strategic policy direction
difficult to identify and assess. Geopolitical risk of democracies and authoritarian regimes around
management should screen for relevant information the world, moving towards strong protectionist
and facts — predict megatrends, defining scenarios inclinations for some time. Possible manifestations
based on them, and setting guidelines and guardrails of this megatrend include Europe’s economic
for truly effective risk management. isolation or rising tensions among the world’s
largest economies.
Megatrends as a starting point
• Disruptive technologies: The radicalization and
Geopolitical risks are assessed top-down, starting with destabilization of societies through disruptive
analyzing megatrends and trends. Trends are identified digital technologies is accelerating. New tools and
as the noticeable trajectory of development, whereas platforms, such as AI and social media, unlock
megatrends are viewed as significant, slow-moving new opportunities and risks. For example, the
forces. These are distinguished by their broad reach unprecedented threat of technologies being used
and longevity, intricate interconnections, and profound as economic and political weapons — unethical AI
influence on economic, political and social spheres. algorithms, fake news, ransomware, cyberattacks
and cyber-terrorism — has created a disturbing
new reality.

The Russia-Ukraine War underscores global fragmentation. Nations have imposed sanctions on Russia and on Russian banks, companies and
individuals, spurring shifts towards self-reliance and altering alliances, driving a pivot from global unity to protectionism. Possible scenarios for
the war include the escalation towards increasing geopolitical tensions or alternatively a de-escalation and diplomatic solution for the region.

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 Geopolitical risk drivers — keeping No need to reinvent the wheel — The absence of a strategy Embracing the shift in
it simple amid complexity same methods, different goals is the worst strategy geopolitical risk management

The question of complexity Figure 1 — Forecasting geopolitical risks

The geopolitical risk drivers identified will serve as
the foundation for developing scenarios that cannot
Available Trends and Relevant Possible scenarios based upon
be ruled out due to their significant risk potential and
information megatrends risk drivers relevant risk drivers
business impact. The focus is neither on correctly
calculating the risk potential nor the likelihood of
defined scenarios occurring. Instead, the objective is
Scenario 1
for business leaders to be aware of relevant risk drivers Risk

Trend
Megatrend
and to actively address the resulting scenarios. driver 1

Due to multifaceted interactions between defined

Trend
Scenario 2
risk drivers, the complexity of possible scenarios Identify Choose Develop
can increase unpredictably (Figure 1). As complexity
increases, so does the danger of ignoring geopolitical Scenario 3

Trend
risks amid a mistaken belief that the institution cannot
Risk
cope with the complexity it faces. The inevitable Scenario 4
driver 2

Megatrend
question is: What complexity do you need to penetrate,

Trend
and what can you actually penetrate?
The question of complexity is closely linked to the

Trend
question of how to respond: How many resources Scenario 5
will your organization devote to the challenge, how
much new expertise will be needed internally, and
how should governance be shaped? The answers to
these questions depend on the size of an institution, Past Present Future
its global reach, the complexity of the business model,
and the strategy for dealing with geopolitical risks, Source: KPMG International
whether they are protectionist or proactive. Answering
these questions requires an initial structured analysis
and understanding that today’s geopolitical instability is
a new reality, not just a passing phase.

Key actions
Before deciding on governance and resources, start with a few relevant risk trends and drivers and perform an initial analysis. Develop your approach from there.
The more experience gained, the more sophisticated methods could be used to identify central risk trends and drivers, such as KPMG’s Dynamic Risk Assessment.2

2
Dynamic Risk Assessment, The power of four, KPMG Australia, 2023.

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 Geopolitical risk drivers — keeping No need to reinvent the wheel — The absence of a strategy Embracing the shift in
it simple amid complexity same methods, different goals is the worst strategy geopolitical risk management

02
No need to
reinvent the
wheel — same
methods,
different goals

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 Geopolitical risk drivers — keeping No need to reinvent the wheel — The absence of a strategy Embracing the shift in
it simple amid complexity same methods, different goals is the worst strategy geopolitical risk management

Mitigating geopolitical risks through Figure 2 — Framework for managing geopolitical risks
familiar methods
Financial institutions regularly navigate risks using
various analytical methods. While geopolitical risks
are common in their operations, currently there is
Risk drivers Risk profile matrix
no standardized approach for managing them in the Developing a list of current Using standardized scoring
financial sector. This absence of a market standard risk drivers as a basis for methodology by business
stems from the need to adapt familiar risk assessment concrete scenarios. area, country, region, etc.
techniques like scenario analysis to the unique
challenges of geopolitical risk.
Unlike traditional risk management practices focused
on estimating event probabilities and financial impacts,
or solely preparing for specific emergencies, the
objective here is different. It’s about fostering a
proactive mindset, ensuring readiness to respond
effectively to unexpected emergencies. Rather than Impact analysis
aiming for precise future predictions, the emphasis • Prioritization of risk drivers based on the risk exposure and
is on cultivating adaptive thinking and actions among identification of missing information.
decision-makers and staff, fostering resilience in
• Definition and identification of concrete scenarios and description of
today’s dynamic environment.
impact chains of risk drivers on individual risk types (e.g. credit risk,
Impact analysis and assessment market risk, liquidity risk, etc. )
enhance geopolitical risk resilience
The approach outlined treats geopolitical risks as key Deep dive
factors influencing risk and draws on principles from
ESG risk management (see Figure 2). The starting point Assessment
is creating an extensive list of current significant risk Analyze what actions can be taken, assess selected focus scenarios
drivers as the basis for concrete and realistic scenarios. by looking at how risk drivers impact individual risks both
To pinpoint pertinent risk factors, a geopolitical risk quantitatively and qualitatively.
profile matrix is employed. This profile can categorize
risks based on exposure across various dimensions such
as countries, regions, sectors, and business areas. Source: KPMG International

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 Geopolitical risk drivers — keeping No need to reinvent the wheel — The absence of a strategy Embracing the shift in
it simple amid complexity same methods, different goals is the worst strategy geopolitical risk management

Next, findings from the risk profile matrix and the list of
risk drivers are combined into an impact analysis. The
goal is to prioritize the identified risk drivers by exposure
and to analyze the impacts of high-level scenarios
formulated through these drivers on individual risk
types such as credit risk, market risk, and liquidity risk.
Following the Russian
Specific key scenarios of interest or relevance can then
be developed for more detailed analysis based on the government’s invasion
impact analysis. of Ukraine in 2022,
the analyses and
During the assessment stage, the selected key
assessments of banks
scenarios are analyzed quantitatively and qualitatively to
determine their hazard potential, scope of impact and revealed impact chains
identify potential actions that can be taken. However, it and compliance hurdles
is important to go beyond analyzing scenarios that are across all risk types,
currently considered realistic. In particular, exploring notably affecting risk
worst-case scenario’s can provide critical insights into management, investments
building geopolitical resilience. and balance sheets. Best
The results of this assessment should be presented practices, however, also
in a manner that is appropriate to stakeholders. For included extensive stress
example, lists of high-priority scenarios can be created testing and plans for
based on the need for action and the scope of the scenarios with improved
impact, while heat maps of particularly critical risk
stability in the region,
drivers can be created and monitored with AI-based
tools such as news crawlers. reduced market uncertainty,
and potential opportunities
Financial institutions should develop an action plan with for investment.
short-term or medium-term measures to best identify
information gaps that require a deep dive.

Key actions
To help ensure effective geopolitical risk management, engaging an interdisciplinary team, particularly in scenario analysis, is important. Strong leadership with
crucial senior management involvement, rather than just commitment, is also necessary to prevent operational gaps.

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 Geopolitical risk drivers — keeping No need to reinvent the wheel — The absence of a strategy Embracing the shift in
it simple amid complexity same methods, different goals is the worst strategy geopolitical risk management

03
The absence
of a strategy
is the worst
strategy

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 Geopolitical risk drivers — keeping No need to reinvent the wheel — The absence of a strategy Embracing the shift in
it simple amid complexity same methods, different goals is the worst strategy geopolitical risk management

In today’s challenging geopolitical reality, ignoring the Between these two extremes, there exists a spectrum but also empowers organizations to adopt a proactive
need for a strategy is simply not viable. While adopting of strategies that can vary based on region, industry, stance. By identifying top scenarios and developing
a ‘head-in-the-sand’ approach might offer temporary level of proactivity, and other factors. It is here that we corresponding action plans, companies can ensure that
relief, it’s inevitably unsustainable amidst ongoing recognize a pivotal shift is required — from a traditionally both executives and boards are actively engaged in
instability and permacrisis. reactive posture to a more dynamic, proactive navigating the geopolitical landscape.
approach in managing both risks and opportunities. For
The previous two sections outlined a structured analysis The right expertise is crucial
decades, businesses have predominantly responded to
of geopolitical risks and their potential impact on the
geopolitical developments as temporary fluctuations. Selecting the right strategy requires both an external
institution. This section explores why a concrete and
However, with the landscape now marked by and internal perspective, including a thorough
meaningful geopolitical strategy aligned with business
structural changes and the rewiring of geopolitical understanding of geopolitical, economic, market, and
and risk strategy is necessary to ensure informed
alliances, the value of anticipation over mere reaction industry environments and an objective assessment of
management decisions.
has significantly heightened. strategic implementation. The success of an offensive
Strategy as a starting point Leaders are increasingly crafting geopolitical or diversified strategy hinges on a mature governance
playbooks, moving beyond the conventional response framework, sophisticated risk assessment and impact
When addressing geopolitical risks, two contrasting
mechanisms. This proactive development signifies analysis methods. Building this capability requires
approaches emerge. One is a purely defensive strategy,
a major transformation in how companies engage perseverance, strategic foresight and commitment from
emphasizing safeguarding the business against potential
with geopolitical dynamics. A sound methodology management.
risks. The other is an offensive strategy, characterized
by proactive engagement and perceiving geopolitical is essential to begin managing geopolitical risks. It If conditions are not yet conducive to adopting a
shifts as opportunities. While the defensive strategy provides the foundation for a structured discussion sophisticated strategy, a medium-term approach
aims to shield the organization from geopolitical shocks that leads to well-founded assumptions and informed focusing on opportunistic views of geopolitical risks
and risks broadly, the offensive strategy aims to management decisions. These decisions are then can offer significant advantages, transforming potential
capitalize on them. incorporated into various strategies, such as business risks into opportunities. Moreover, a protective stance in
or risk strategies, ultimately resulting in adjustments to geopolitical risk management stabilizes institutions even
multiple processes, for example, the lending process. in times of crisis. Understanding possible scenarios
At this critical geopolitical juncture, the integration of and monitoring risk drivers enables informed action and
strategy and risk management across various time rapid response capabilities, underlining the dramatic
horizons becomes paramount. Adopting a long-term changes in our global landscape.
In response to the conflict in Ukraine, perspective not only facilitates the anticipation of issues
banks have pursued an overall defensive
strategy, driven by risk and shock mitigation
as well as compliance with sanctions.
Actions included the freezing of assets, the Key actions
diversification of investment and lending Developing a plan is an iterative process. A sound methodology can serve as a starting point
portfolios and the enhancement of risk and to overcome the complexity hurdle. Begin with a smaller assessment to create awareness and
compliance functions. facilitate the first iteration.

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 Geopolitical risk drivers — keeping No need to reinvent the wheel — The absence of a strategy Embracing the shift in
it simple amid complexity same methods, different goals is the worst strategy geopolitical risk management

04
Embracing
the shift in
geopolitical risk
management

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 Geopolitical risk drivers — keeping No need to reinvent the wheel — The absence of a strategy Embracing the shift in
it simple amid complexity same methods, different goals is the worst strategy geopolitical risk management

Future-proofing against global risks Don’t try ‘to reinvent the wheel’ in this
environment. Financial institutions can fall back
Inflation. Recession fears. The global battle for talent. on a toolbox of appropriate and proven methods for
Ongoing conflicts in Europe and the Middle East. effective risk management. Develop a timely plan
Labor market challenges. Supply chain disruption. that effectively applies the same trusted methods to
As the geopolitical landscape grows more complex different goals. It’s not about predicting the future —
and unpredictable, its troubling impact on the world’s it’s about pursuing new ways of thinking and acting.
economy is undeniable.
Develop an informed strategy. Beware —
Global CEOs now rank geopolitics and political proceeding in today’s uncertain environment without
uncertainty as the greatest risk to business growth. a solid strategy is not an option. A ‘head-in-the-sand’
Forward-looking businesses are wisely recognizing approach amid fears of making the wrong decisions
the need for decisive action amid today’s profound is unsustainable in these times of instability. The right
challenges. Simply put, strategic management of strategy requires an outside view — an understanding
geopolitical risks should be high on the agenda of of the geopolitical, economic, market and industry
every financial organization. environment — and an informed inside view that
Business leaders should be implementing three key objectively assesses which strategies to implement.
steps amid the pressing need for a new reality of KPMG professionals understand the importance
geopolitical risk management: of implementing risk-management strategies
Screen for relevant information and facts. Identify that harmonize with present-day requirements.
key megatrends, define your response scenarios and Assisting leaders across all sectors in navigating
establish guidelines for effective risk management. future pathways, the emphasis lies on the urgency
Avoid being overwhelmed by the complexity of of adapting and taking action to surmount prevailing
today’s evolving geopolitical regimes. Start by closely global challenges and maintain competitiveness.
examining two geopolitical megatrends at play —
global fragmentation and disruptive technologies.

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 Geopolitical risk drivers — keeping No need to reinvent the wheel — The absence of a strategy Embracing the shift in
it simple amid complexity same methods, different goals is the worst strategy geopolitical risk management

How this connects with what we do

The complex and unpredictable geopolitical landscape requires risk and control KPMG transformation journey
management to adapt and evolve. KPMG firms recognize the paramount
importance of continuous further development of established risk management
practices. Our KPMG professionals bring a wealth of experience and the
courage to take on new and challenging risks, such as geopolitical risks.
Working together with KPMG firms can bring significant value to your risk
management while ensuring it closely aligns with your strategic business
goals. KPMG professionals collaborate with you to develop tailored risk
KPMG Connected KPMG Powered
management strategies that help you manage your risk environment actively
Enterprise Enterprise
and proactively. KPMG firms’ skilled team of risk professionals can help improve
Rebuild your business, end to Drive outcome-driven
your organization’s resilience with risk management practices that consider the end, around your customers. functional transformation.
ever-evolving business and global landscape.
To learn more at kpmg.com/riskconsulting

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Contacts
Fabiano Gobbo Justin Malta Stefano Moritsch Arvind Sarin
Partner, Financial Services Partner, Financial Services Global Geopolitics Lead Partner, Financial Services
KPMG in Italy KPMG in the UK KPMG in Kenya KPMG in Germany
fgobbo@kpmg.it justin.malta@kpmg.co.uk stefanomoritsch@kpmg.co.ke arvindsarin@kpmg.com

Narinder Singh Brian Hart Matthias Mayer Karim Haji

Partner Principal, Financial Services Risk Partner, Financial Services Global and UK Head of Financial Services
KPMG in the UK KPMG in the US KPMG in Germany Partner, KPMG in the UK
narinder.singh@kpmg.co.uk bhart@kpmg.com matthiasmayer@kpmg.com karim.haji@kpmg.co.uk

Michael Monteforte Markus Quick Christian Heichele

Partner, Financial Risk Management Partner, Financial Services Partner, Financial Services
KPMG China KPMG in Germany KPMG in Germany
michael.monteforte@kpmg.com markusquick@kpmg.com cheichele@kpmg.com

kpmg.com

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Publication name: Managing today’s geopolitical risks | Publication number: 139276-G | Publication date: May 2024